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The past decade saw the rise of both “founder-friendly” venture financings and non-traditional investors, frequently with liquidity constraints. Using detailed contract data, we study open-end mutual funds investing in private venture-backed firms. We posit an interaction between the classic agency problem between entrepreneurs and investors and the one between early-stage venture investors and liquidity-constrained later-stage ones. We find that mutual funds with more stable funding are more likely to invest in private firms, and that financing rounds with mutual fund participation have stronger redemption and IPO-related rights and less board representation, findings consistent with our conceptual framework.


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